Chapter 2

Chapter 2: External Sourcing

Why is Sourcing Important?
The first step in getting the supply chain right is sourcing the products and services. There is also
a need to balance the quality of the products and the raw materials that one needs. Moreover,
affordability of the products is also an aspect that needs to be considered where sourcing is
concerned, as it directly impacts the bottom line.

A well-executed sourcing process allows your company to establish consistent and predictable
supply chains; in turn, shelves stay well-stocked, keeping customers happy. When sourcing is done
right, it can positively affect your brand image and help create brand loyalty.

Strategic sourcing also helps in cost management by providing benefits for both the buyers and
the suppliers. Negotiating lower unit pricing for high volume purchasing reduces the cost of goods.
It allows the business to keep its pricing competitive. On the other hand, the suppliers benefit by
having a consistent outlet for their goods, making planning and cash flow more dependable.

Benefits of Sourcing
The four benefits of sourcing are:

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1. Cost-Saving
The first and most popular benefit of strategic sourcing is the amount of money that organizations
can save by selecting and choosing suppliers that will offer the highest value at the best price
possible. This will have a domino effect and positively affect your bottom line.

2. The honing of ideal suppliers

Effective implementation of a sourcing process has its foundation on the quality of the suppliers
involved. Procurement teams should have on-hand supplier profiles and understand the core
capabilities of the suppliers they choose. This allows you to match your organization’s objectives
with your ideal supplier resulting in the highest value creation at the lowest possible cost.

3. The establishment of a long-term relationship with suppliers

When suppliers are valued and considered in various sourcing decisions, they will feel motivated
and optimize their performance to meet your organization’s objectives.

Diversity and Inclusion in Procurement and Sourcing

Establishing diverse supply chains can have significant benefits for your company. Aside from
increasing revenue, diverse and inclusive supply chains are more competitive, encourage
innovation, provide new markets opportunities and deliver socioeconomic impact in local
operating markets.

So how can you accelerate supply chain diversity in your company?

1. Determine where your procurement dollars are going

Developing a basic understanding of external procurement expenses is essential to building a more
diverse and inclusive supply chain.

2. Identify diverse suppliers aligned with crucial spend categories.

Once you understand the significant categories of spend, you can begin broadening your pool of
potential suppliers within each category. Look for platforms that can connect you with diverse
suppliers. Advocacy and diversity certification organizations are an excellent place to start.

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3. Establish inclusive procurement policies.

Ensure that you choose at least one diverse supplier in competitive supplier selection/RFP
processes.

Procurement vs. Sourcing: What's the Difference?

There tends to be a little confusion where terms like procurement, purchasing, and sourcing are
concerned. The terminology is related and sometimes used interchangeably, but each has a distinct
meaning.

As a procurement or business leader, you need a complete understanding of the differences to help
you gain a better understanding of the sourcing process. So, without further a due, let’s establish
the differences.

Typically, procurement is concerned with acquiring the goods and services that are vital to an
organization. Procurement is tasked with acquiring high-quality goods at the right time to meet
company needs. The procurement process helps you gain insight and control over your company’s
spending habits, minimize errors and fraudulent spending and boost efficiency by streamlining
procure-to-pay-cycle.

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Procurement involves multiple processes and numerous steps such as:

• Needs recognition
• Requesting goods and services
• Review and approval
• Sourcing
• Purchase order
• Receipt of goods or services
• Receipt of invoice
• Pay invoice
On the other hand, sourcing focuses on finding the best possible supplier of goods and services
and negotiating the most favorable contract terms.

Sourcing involves:

• Defining the need

• Researching the market
• Running sourcing events
• Vetting suppliers

External Supply Chain Definition

An external supply chain is a network of suppliers, manufacturers, and other partners that work
together to provide goods or services to customers. The term can also refer to the process of
managing these relationships.

External supply chains are often complex, with many different stakeholders involved. They can be
global in scope, spanning multiple countries and continents. Managing an external supply chain
requires careful planning and coordination.

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The goal of an external supply chain is to provide goods and services that meet customer demands
in a timely and cost-effective manner. To do this, businesses must carefully manage supplier
relationships, inventory levels, transportation logistics, and other factors.

External Sourcing: Everything You Need to Know

External sourcing refers to the procurement of goods necessary for business operations from third-
party organizations.
External sourcing refers to the procurement of goods necessary for business operations from third-
party organizations. It is often a good idea, especially in cases where it is cheaper and easier to
secure the items that way.

There are several factors that may influence a business's decision to source for goods externally.
They include financing requirements, lack of necessary skills, scheduling or incapability of the
business. While outsourcing means the bringing in of goods, services, and manpower from external
sources, internal sourcing refers to the use of internal labor to achieve the same. All businesses are
faced with the decision of whether or not to source externally for needed resources.

Most businesses often face several challenges in the bid to enhance their financial standing. These
challenges include inadequate cycle time, the cost of goods sold, and product design and quality.
The application of supply chain management techniques helps businesses to control these factors
resulting in improved costs, quality and delivery cycle time. These goals are achieved by
leveraging strategic sourcing — which helps the business to decide whether to outsource certain
production activities to third-party concerns or keep them in-house.

External sourcing refers to the procurement of goods necessary for business operations from third-
party organizations. It is often a good idea, especially in cases where it is cheaper and easier to
secure the items that way.
There are several factors that may influence a business's decision to source goods externally. They
include

• financing requirements,

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• lack of necessary skills,

• scheduling or incapability of the business.
Most businesses often face several challenges in the bid to enhance their financial standing. These
challenges include inadequate cycle time, the cost of goods sold, and product design and quality.
The application of supply chain management techniques helps businesses to control these factors
resulting in improved costs, quality and delivery cycle time. These goals are achieved by
leveraging strategic sourcing — which helps the business to decide whether to outsource certain
production activities to third-party concerns or keep them in-house.
When looking to externally source some of its business functions, organizations should adhere to
the following steps
1. Identify the reasons for strategic sourcing
2. Outline clear objectives and goals
3. Create cross-functional teams
4. Undertake supplier research
5. Prepare RFQs (request for quote)
6. Send RFQs to vetted suppliers
7. Analyze responses
8. Undertake site visits and negotiations
9. Award the outsourcing contract

Reasons to consider outsourcing your supply chain

1. Strategic positioning
Companies can outsource their supply chain to facilitate efficient service and business growth.
Getting entangled with the strategic and tactical details involved in SCM can sidetrack businesses
from their core competencies. Outsourcing supply chain processes enables companies to focus
their time, energy and resources on what they do best — developing better products and services
for their customer base.

2. Increased value
External supply chain partners bring capabilities, solutions and expertise that will take companies
several years and significant capital outlay to develop in-house. The expertise they bring to the
table can be extremely valuable, especially if they specialize in your region, industry and vertical.
They also leverage operational excellence tools that help to boost efficiency and productivity in
your business operations.

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3. Reduced operational cost

Supply chain activities come with a lot of infrastructure, overhead and staffing costs. Such
operating and capital expenses can quickly add up and significantly impact a company’s
profitability…if not handled properly. It’s often more cost-effective to outsource supply chain
activities to a reliable third-party than to handle it in-house. The savings may be greater if the
supply chain is outsourced to an overseas partner.

4. Improved ability to meet customer demand

Customer satisfaction is key to any sustainable, long-term business enterprise, and this can only
be achieved when supply chains are operating optimally. Outsourcing such functions to an expert
partner helps to reduce the chance of an inefficient supply chain, which can seriously damage
customer relationships and profitability. Third-party suppliers are better equipped with the human
resources, technology and effective processes to ensure all supply chain processes flow smoothly
and efficiently.

5. Flexibility
Since third-party suppliers are better equipped with the tools and technologies for managing supply
chains, they are in a better position to adapt to changing market conditions and consumer
preferences. Their resources and expertise are particularly invaluable when companies need to
scale production in line with fluctuating customer demands.

6. Increased working resources

When you partner with third-party supply chain companies, you gain access to their working
resources and industry expertise. Leveraged correctly, these resources can help you gain an edge
over larger players in your industry.

7. Risk mitigation
Working with 3rd party supply chain partners can help you achieve better visibility, security, and
control into areas like compliance, quality, lead times and inventory levels. This enhanced
visibility allows you to identify areas of risk and take proactive steps to mitigate the impact. You
can work with your supply chain partner to reduce lead times, prepare for audits, secure back-up
suppliers and optimize safety stock.

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Today, it’s no longer a question of whether you should outsource. Most business leaders are well
past considering the pros and cons of supply chain outsourcing. Instead, they are looking to see
how much of their supply chain activities can and should be outsourced.

There are several factors to consider when looking for a third-party service provider to outsource
your supply chain management needs. To derive maximum value from your investment, you need
to choose an SCM firm that has the capacity, experience and expertise to effectively handle your
current and future SCM needs. Here are a few things to look out for when searching for a service
provider:

• Ability to scale along with your operations

• Agility to evolve as your supply chain needs fluctuate
• An array of the best technological SCM and other related platforms
• Advanced level of automation
• Availability of capacity and internal resources to deliver best-in-class service in warehousing,
transportation, etc.
Effective SCM is vital to business success. Outsourcing this aspect of your operations can help
you achieve operational maturity, healthy inventory levels, and better meet customer demands.
Not only will you benefit from the increased customer satisfaction that supply chain companies
deliver, but you also will reduce operational costs and improve your company’s bottom line.

What is the role of outsourcing in supply chain management?

A Deloitte study shows that 79% of businesses with highly efficient supply chains enjoy greater
than average revenues compared to others in their industries. Also, businesses with such optimal
supply chains enjoy 3x faster cash-to-cash cycles and have 15% lower supply chain costs while
keeping only 50% of the inventory holdings compared to their counterparts with sub-optimal
supply chains. Evidently, these businesses are enjoying the benefits of superior SCM management.

Businesses that poorly manage their supply chains are usually overwhelmed by supply chain issues.
These issues arise from several areas including unprecedented growth in inventory, uptick in
customers’ orders, evolving consumer demands, logistics last-mile delivery problems and
inefficient replenishment, among others.

This makes it difficult for such businesses to focus on core functions, increase their customer base
and market share and grow revenues. All this stems from inefficient SCM.

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From inventory management and replenishment to order fulfillment and last-mile delivery, each
stage of the supply chain is a strategic tool that can be used to further business objectives.

Done right, supply chain management results in smooth business operations and happy customers.
This is because SCM is essential to maintaining healthy inventory levels, ensuring fast and reliable
delivery of customers’ orders and healthy profit margins for businesses.

Thanks to the services offered by supply chain management firms, companies can now focus
exclusively on their core competencies rather than expending time and assets on logistics
management.

Savvy companies outsource supply chain management to professionals to gain several important
advantages and thus, better position themselves for business success. Reliable third-party logistics
providers take over the hassle of managing your supply chain network, allowing you to:

• Build better products/services

• Develop new ideas
• Market and strengthen customer relationships
• Ideate and implement future growth strategies
What’s more — outsourcing to the right service provider not only frees your company to focus on
long-term success, but you also enjoy the competitive advantage that comes with hiring supply
chain management professionals. This includes access to their resources, skills, capabilities,
technologies and business networks.

What is Supplier Selection?

Supplier Selection is the process of identifying, evaluating, and choosing the most suitable
suppliers to provide goods or services for an organization. It is a crucial aspect of the
procurement process as the performance and reliability of suppliers can significantly affect the
organization’s overall operations.

It allows procurement managers to choose the best and most suitable supplier by setting metrics,
measures, and criteria to evaluate whether the potential suppliers are reliable, competent, and
trustworthy as well as if they meet the organization’s goals.
The supplier selection process is essential to ensure that the organization is carefully selecting its
suppliers resulting in less risk and a streamlined procurement process. It is the process of finding
the most compatible procurement partner.

What is Supplier Selection Criteria?

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Supplier selection criteria are the measures, metrics, and key characteristics that an organization
looks for in a potential supplier. It defines the most important specifications and requirements of
an organization that potential suppliers should meet in order to be a serious candidate.
Strategic decision-making and careful selection of suppliers can lead to an improved
procurement operation, better quality, fewer costs, minimized risk, and an overall efficient
operation. This is all possible by setting criteria to compare the capabilities, stability, and
products and services of supplier prospects.

Well-defined supplier criteria will allow procurement managers to easily distinguish the most
suitable supplier out of all the candidates.

Factors to Consider in Supplier Selection

When making and setting criteria for supplier selection and evaluation, you should, as a
procurement manager, consider the factors and key elements that your organization is looking
for. This will help define the overall supplier selection process and create accurate selection
criteria that will fit the specifications and requirements of your procurement operations.
Here are some factors to consider:
1. Price and Cost Competitiveness
Despite the importance of quality, it is also important for organizations to strike a balance
between effectiveness and cost. Because it might entail compromising quality or service levels,
selecting the most expensive supplier may be no longer a good option. Instead, businesses should
seek suppliers who offer a price that does not compromise on quality and allows them to retain
profitability while meeting their customers’ needs.
2. Capabilities
Another important factor is the capability of the supplier to meet current and future requirements.
In terms of volume and timeframe, organizations assess whether they can meet their demands
from the prospective supplier. Additionally, the evaluation of a supplier’s scale guarantees that
they are able to cope with increasing demand as their market size increases.
3. Financial Stability
In order to avoid interruptions in the procurement process, it is crucial that suppliers are stable.
For the purposes of determining their solvency, and for assessing all financing risks they may
present, an analysis of prospective suppliers can be useful. It is more likely that long-term
contracts are to be fulfilled and complied with by the financially stable supplier.
4. Location
The geographical location of the supplier can influence logistics, lead times, and shipping costs.
For businesses that rely on “Just Intime Manufacturing” or require swift response to customer
demands, the proximity assessment is critical. In contrast, to gain economies of scale or access to
unique resources, some industries may prefer foreign suppliers.
5. Ethical and Social Responsibility
Organizations must align themselves with suppliers, who adhere to ethical practices in an era of
increased corporate social responsibility. Ethical policies, working practices, the impact on the

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environment, and sustainability commitments by suppliers should be examined by organizations.

It is not only about enhancing a brand image but also mitigating the risk of negative publicity
and potential legal problems by working with socially responsible suppliers.
6. Technological Capability
The key driver of growth and competitiveness is innovation. An analysis of the provider’s
commitment to innovation and its technological capabilities can reveal how it delivers cutting-
edge solutions, as well as stays on top of industry trends. A supplier with an innovative approach
could bring fresh ideas, improved processes, and new products to benefit both parties involved.
7. Reliability and quality
The quality of your suppliers' products or services must meet or exceed your expectations.
Reliability guarantees that quality remains consistent over time. Analyse the track record,
certifications, and adherence to industry standards of the supplier.
8.Capacity and Scalability
Consider the capacity and scalability of a supplier. Will they be able to meet your present and
future demands? Scalability is critical for accommodating growth and evolving market conditions.
Ensure that your provider can scale production or services as needed.
9.Regulatory Compliance
Regulatory compliance is critical, particularly in industries with stringent regulations. Ensure your
provider follows industry-specific rules and quality requirements. Non-compliance might result in
legal and adverse effects on reputation.
10.Communication and Collaboration
Effective communication and collaboration are essential for a successful supplier relationship.
Evaluate a supplier's responsiveness, communication channels, and ability for problem resolution
and process improvement.
11.Risk Management and Preparedness
Identify potential risks and evaluate a supplier's risk management procedures. Analyse their
contingency plans for disruptions like natural disasters or supply chain interruptions. An effective
risk management strategy exhibits a supplier's commitment to reliability.
12.Cultural Fit
Although frequently neglected, cultural fit can be important in supplier partnerships. Consider
whether the supplier's values, culture, and communication style are compatible with yours. A good
cultural match can improve collaborative efforts.
What are the criteria for selecting a supplier?

• Think strategically while selecting suppliers.

• Effective suppliers tailor their services to your requirements.
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• Determine the number of suppliers you require;

• a focused group provides greater control.
• Consider dependability, quality, value, service, and financial stability variables.
• Recommendations, directories, and trade groups all aid in the identification of possible
suppliers.
• Choose suppliers based on their ability to meet your demands, not just their pricing.
• Negotiate contract conditions with the chosen supplier.
• Ensure you understand your needs, seek guidance, run credit checks, and consider variables
other than price.
• Establish service levels in advance.
• Identify alternate sources, especially for strategic requirements.
Software Available for Managing Supplier Selection Criteria
1. Kissflow Procurement Cloud
Kissflow Procurement Cloud provides end-to-end procurement solutions to help with your
procurement process. It also helps improve vendor relationships, thanks to the software’s ability
to collect all vendor and supplier data into one platform. This makes it easier for users to set up
their metrics. The product software is easy to integrate with other accounting tools, ERP systems,
and other business software.
2. SAP Ariba
SAP Ariba is a cloud bases procurement software that provides spending management, and
supply chain services that allow suppliers and buyers to connect and do business, worldwide.
Provides other functions such as sourcing, contracting, supplier management, and payment
management.
3. Precoro
Precoro is a full-fledged procurement software that eliminates manual work processes to save
time, resources, and money. It is all about removing delays to make purchasing seamless and
secure.
4. GEP SMART
GEP SMART supplier collaboration software is an all-in-one platform that simplifies the
process of collecting, storing, sharing, and tracking supplier information. It offers a range of
tools to manage supplier relationships effectively, making it easier for vendors to provide data
and for manufacturers to collect it.
The software automates data capture and standardizes communication, resulting in accurate
information that promotes smooth collaboration between suppliers and manufacturers.
Additionally, GEP SMART provides vendor collaboration dashboards, allowing suppliers to
manage their profiles, catalogs, and pricing.
This feature reduces the workload and administrative tasks for procurement teams, enabling
them to concentrate on essential supply chain operations. With GEP SMART, businesses can
streamline their supplier management processes and improve efficiency in their procurement
operations.

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What is Supplier Quality Management?

Supplier quality management (SQM) is a process used to ensure that suppliers consistently deliver
goods and services that meet agreed standards. SQM helps companies improve the quality of their
supply chain, reduce costs, and gain a competitive advantage.
The supplier quality management system aims to help companies achieve a high level of
product quality at the lowest possible cost. The process involves identifying problems early,
monitoring progress, and taking corrective action when necessary.

To be successful, SQM requires close collaboration between buyers and suppliers. Buyers must
work closely with suppliers to identify and resolve issues quickly. It means that buyers need to
understand the importance of supplier quality and take responsibility for ensuring that suppliers
deliver high-quality products and services.

Buyers should also monitor supplier performance regularly, including measuring supplier quality
against agreed standards. It’s also essential for them to look at supplier performance reports and
use them to look for areas where they can make continuous improvements.

Finally, buyers should communicate clearly with suppliers about expectations and requirements.
It ensures that suppliers deliver consistent quality, regardless of who is responsible for each stage
of the production process.

What are the best strategies for ensuring quality when sourcing from new suppliers?

1. Define your quality requirements

2. Conduct due diligence
3. Negotiate a quality agreement
4. Monitor and evaluate performance
5. Provide feedback and support
6. Review and revise the relationship

Define your quality requirements

The first step to ensuring quality when sourcing from new suppliers is to define your quality
requirements clearly and precisely. What are the specifications, standards, certifications, or
regulations that you need to comply with? What are the quality criteria, indicators, or metrics that
you will use to evaluate the supplier's performance? How will you communicate, document, and

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verify these requirements with the supplier? By defining your quality requirements upfront, you
can avoid ambiguity, confusion, or misunderstanding that could lead to quality issues later.

To ensure high product quality with new suppliers, evaluate them thoroughly, define clear
specifications, and establish a robust quality control plan. Ensure compliance with industry
standards and consider third-party testing. Prototype testing helps identify early discrepancies. Set
performance metrics for ongoing evaluation and encourage transparent communication. Foster a
culture of continuous improvement and maintain meticulous documentation. Implement a
structured feedback system and consider diversifying your supplier base. These strategies should
collectively strengthen your focus on maintaining consistent product quality with new suppliers,
preserving your brand's reputation and customer satisfaction.
checks at new vendors. 1- Define Quality metrics and standards 2- Vendor Pre-Qualification 3-
Audit and Inspections 4- Market Repute and Reference checks 5- Certifications 6- Quality Control
Plan 7- Risk Management Plan

Conduct due diligence

The second step to ensuring quality when sourcing from new suppliers is to conduct due diligence
on their background, reputation, and capabilities. You need to verify that the supplier has the
necessary qualifications, experience, and resources to deliver the quality you expect. You can do
this by checking their references, testimonials, portfolios, certifications, or awards. You can also
visit their premises, inspect their facilities, equipment, and processes, or request samples,
prototypes, or trials. By conducting due diligence, you can reduce the risk of choosing an unreliable,
unprofessional, or unethical supplier.

It is of utmost importance to get all possible information on supplier’s experience and capacities.
Visiting the factory premises and production facilities is non-negotiable. You can get to see what
they are producing, the quality standards being maintained, whether best practices are being
followed or not during production. Having seen the production floor brings you peace of mind and
assurance if you are satisfied with all the aspects of the factory, and surely you can see instantly if
there is any room for improvements. If the factory has provided Audit documents, it should be
visible in the operating systems, which can help you decide on the factory’s capabilities.

Negotiate a quality agreement

The third step to ensuring quality when sourcing from new suppliers is to negotiate a quality
agreement that outlines the roles, responsibilities, and expectations of both parties. A quality
agreement should cover the scope, specifications, standards, and criteria of the products or services
to be delivered, as well as the quality assurance, control, and improvement methods and tools to
be used. It should also define the quality objectives, targets, and indicators to be measured and
reported, as well as the quality incentives, penalties, or remedies to be applied in case of non-
conformance or deviation. By negotiating a quality agreement, you can establish a clear and mutual
understanding of what quality means and how it will be achieved and maintained.

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While evaluating the supplier, apart from quality certification, look at the process quality. Provide
support as required through your quality organization. Look at a long-term perspective and support
suppliers with the best practices which they can adopt to excel in their quality. Techniques like
TPM, 6 Sigma etc. irrespective of the sector can help improve the quality. Always aim at Zero
Defect from suppliers and carry out objective evaluation of supplier's quality and provide feedback
to them. Keep stretched targets with carrot & stick approach towards achieving those.
Monitor and evaluate performance

The fourth step to ensuring quality when sourcing from new suppliers is to monitor and evaluate
their performance regularly and systematically. You need to collect, analyze, and report data on
the quality outcomes and outputs of the supplier, as well as the quality inputs and processes they
use. You can use various methods and tools to monitor and evaluate performance, such as audits,
inspections, tests, surveys, feedback, reviews, or scorecards. You can also use key performance
indicators (KPIs), benchmarks, or best practices to compare and assess performance. By
monitoring and evaluating performance, you can identify and address any quality issues, gaps, or
opportunities for improvement.

Supplier performance evaluation be done at regularly agreed intervals say min Quarterly using
objectively evaluation using Score-Cards basis their actual achievement of KPIs, and then
reporting their status as feedback for addressing their gaps and provide opportunities for Supplier
Development basis their merits. Alternately deploy Smart Contracts embedded on Blockchain
Distributed Ledger Technology (DLT) for a transparent Supply Chain through Provenance,
Immutability, Traceability, Transparency, and Security.

Continuous Monitoring and maintaining a stable oversight upon the Third Party is the sole
responsibility of the contract giver. Different standard processes are in place to monitor the quality
of product /service (not limited to): -Annual Monitoring report preparation. -APQR annex on
incoming material Quality. -Routine Audit - Periodic Risk Assessment - Event Trend review... All
these help us to identify the overall performance of the material/Service as well as that of the Third
Party. We can identify the risk areas, can analyze and evaluate the same followed by adapting the
risk acceptance or Mitigation strategies. On the other hand, these serve as a monitor of the
performance based on established metrics.
Provide feedback and support

The fifth step to ensuring quality when sourcing from new suppliers is to provide feedback and
support to them on their quality performance. You need to communicate clearly and constructively
with the supplier, highlighting their strengths, weaknesses, achievements, or challenges. You need
to recognize and reward their quality efforts and results, as well as provide guidance and assistance
to help them improve. You can also collaborate and cooperate with them on quality initiatives,
projects, or innovations, or share best practices and lessons learned. By providing feedback and
support, you can build trust, loyalty, and partnership with the supplier, and foster a culture of
continuous quality improvement.

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If your supplier is providing you with a ready product - you can always get a sample upfront and
comment on its quality. In fashion we do a lot of prototyping before the clothes are finalized. For
each sample we keep technical data with measurements, photos and comments. This helps the
supplier understand better your expectations and which areas can be improved. Always share
positive feedback as well and congratulate people when their efforts are exceptional.

In the steel industry, offer clear, regular feedback to your suppliers, both positive and constructive.
Provide training, resources, and support when necessary, and work together to solve problems.
Recognize and celebrate successes to motivate high-quality performance and maintain a positive
partnership.

Review and revise the relationship

The sixth and final step to ensuring quality when sourcing from new suppliers is to review and
revise the relationship periodically and strategically. You need to evaluate the overall performance,
satisfaction, and value of the supplier, as well as the alignment, compatibility, and sustainability
of the relationship. You need to consider the feedback, results, and impacts of the quality
agreement, as well as the changes, trends, or opportunities in the market, industry, or environment.
You need to decide whether to continue, expand, or terminate the relationship, or to renegotiate,
renew, or modify the quality agreement. By reviewing and revising the relationship, you can ensure
that the quality you receive from the supplier meets your current and future needs and expectations.

How Is Supplier Quality Management Measured?

Supplier quality is measured using Quality Management Systems (QMS). They’re made to help
businesses enhance their processes and procedures to produce consistent products.

There are two main types of QMS: internal and external.

Internal QMS measures the quality of goods produced within a company. External QMS measures
the quality and consistency of goods produced by suppliers.

Both types of QMS use metrics to measure supplier quality. Metrics include defect rates, lead
times, cycle times, and inspection results. These metrics are used to determine whether a supplier
is meeting expectations.

When evaluating supplier performance metrics, you should consider the following factors:

• The number of defects per million units – This metric shows how many defects there
were during the last 12 months.

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• The percentage of defective parts – This metric shows the percentage of defective parts
found during inspections.
• Lead times – This metric shows the average amount of time between order placement and
shipment.
• Cycle times – This metric measures the amount of time it takes to produce each product.
• Inspection results – This metric shows the number of defects detected during inspections.

Supplier Quality Certifications

Quality certifications are necessary because they help ensure that suppliers meet specific standards.
They’re also helpful when negotiating contracts with suppliers since they show you’ve done your
homework and are willing to pay extra for quality.

Below are the most popular quality certification programs:

• ISO 9001 is an internationally recognized standard for quality management systems. Many
companies use it to ensure that their suppliers meet specific standards.
• SGS is one of many global companies that provide inspection services for products and
materials. Their inspectors certify products and materials against international safety
standards.
• TÜV is another global company that inspects products and materials to ensure compliance
with safety standards.
• National Sanitation Foundation (NSF) is a third-party organization that tests products to
ensure they comply with food safety regulations.
• Underwriters’ Laboratories (UL) is a third-party testing organization that ensures
electrical equipment meets safety requirements.
Supplier Quality: Selection and Development Flowchart Example

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By: Prof. Parvathy.L 18 of 18